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When international monetary reform will be politically attractive

A common criticism of proposals for reform of the international monetary system is that they are not politically possible. Of course, there are other grounds on which they can be and are criticised – especially when they call for a return to stable exchange rates, a howl goes up that this would sacrifice the domestic economy, and so on. But the “killer” argument is often that reform is just not “on”. Indeed, the very suggestion of reform irritates some people.


But reform has some heavyweight supporters. Among the advocates of reform is Paul Volcker:


“We are left with the certainty, however awkward, that active participation in an open world economy requires some surrender of economic sovereignty. Or, to put the point more positively, it requires a willingness to coordinate policies more effectively.”


Mr Volcker is not known for political naivete. He wouldn’t have been able to outflank the likes of Larry Summers and Tim Geithner and get Congress to enact “The Volcker Rule” if he had been. But even he has failed to persuade governments to consider reforms to world money (Among the very moderate reforms he has suggested as “possibilities” include stronger surveillance by the International Monetary Fund, a firmer commitment by countries to abide by “best practices” and agreed norms; and direct recommendations to governments by the IMF or the G-20 following mandatory consultation).


Another venerated statesman of international finance to appreciate the need for reform is Jacques de Larosiere. He is just as politically adroit as Mr Volcker. How else could he have managed to ward off the threatened collapse of the international financial system in the 1980s (working closely with Mr Volcker, by the way), if he had been? Or the major contributions he has made to the development of the euro, as well as warning about its defects?


Another passionate advocate of reform was the late Tomasso Padoa-Schioppa, former finance minister of Italy as well as leading economist.


Others include Ben Steil and Manuel Hinds, whose book “Money, Markets and Sovereignty” showed that a liberal global trade regime has always historically required a universal monetary standard. Yet, as they point out, such a regime now operates side by side with the most extreme doctrine of monetary nationalism ever contrived – a situation bound to trigger periodic crises.


And of course there is Nobel Prize-winner Robert Mundell, as well as economists such as Ronald McKinnon.


Yet such warnings are dismissed by commentators who fancy themselves as realists but do not have a fraction of the economic or political insight of such observers.


So far, it must be admitted, these sceptics have been right – governments show no inclination to consider reform. The United States still mistakenly feels it benefits from the current non-system, while the euro area governments are so obsessed with the euro’s problems they can’t think of anything else.

Japan, Canada and the UK remain part of the US “imperium”, and obediently toe the party line. Should the US position change, they will all salute the Stars and Stripes and follow suit.

So, as I have written in another place, does the only hope lie with China, India and the Brics? Will they pile on the pressure for a real systemic change?

Perhaps there are other grounds for hope. This is why.

Grounds for hope

Governments in many leading countries are struggling to control their public finances. It is clear that the US, eurozone, japan have the economic capacity to finance them and gradually reduce the ratios of debt to GNP. What is in doubt is their political capacity or will to sustain the effort over the many years needed to get on top of the problem. They know what is needed but cannot find the political common ground for sufficient agreement; the spirit is willing, but the flesh weak.


If political dissension within each area make is impossible to carry through such a cleansing of public finance, an international approach might pay dividends. If each country could be assured in advance that other major trading partners will be subject to the same disciplines, that will an additional factor in the political equation missing at present. But such discipline has to be ex ante. What has been wrong about many attempt and proposals for reform is that they call for coordination ex post – after nations have made their plans, then they are put forward for international discussion. (This has been the problem inside Europe also, by the way). This too late. It is no good trying to discuss adjustments to national positions after these have been thrashed out at the national level – because by that time all the political compromises that can be made will have been made. Also it is likely to remain unacceptable to negotiate on the details of tax and spending priorities. That is why the discipline imposed by a good system has to take the form of a commitment to convertibility of the national currency into an international standard at a fixed rate. Then national policy-makers can be left to judge for themselves which policies are likely to increase market confidence in the country’s adherence to the standard.


That is why I believe that despite all appearances to the contrary radical reform of the international monetary system will become politically attractive, and indeed imperative. It will be seen as a collective effort to secure the global public good of international monetary and financial stability.


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